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Candlestick patterns can signal a trend continuation or reversal. Many traders and investors know how to benefit from candlesticks analysis. As a rule, a simple chart analysis is used that requires analysts to remember and correctly interpret, at least, typical candlestick patterns. However, the number of possible different candlestick shapes and their combinations in a row can be huge. Besides, some patterns interpretations might be considered as contradictory or doubtful.

Fortunately, statistical methods combined with computer power can be a good solution to make the candlestick patterns recognition works less time-consuming and more effective. These days, Neural Network (NN) can help to automate a candlestick patterns recognition task. NN should be properly trained in order to be able to predict the next candlestick parameters with the highest probability. One of the obvious problems of implementing a candlestick pattern NN predicting system is a formalization of inputs.

Numerous tests show many possibilities of improving NN candlestick patterns recognition systems. For example, output result can be composed from selected optimized calculations based on different historical periods. Also there are many different ways to formalize the shapes and relative positions of candlesticks. As well as, as back- and forward-testing show, it is reasonable to re-train NN for each particular type of shares and latest historical periods to make the forecast more accurate.

Optimal Solution. There is an automated tool FTA-2 (free use of fully-functional version for one month). It has module which enables using Neural Network to recognize typical candlestick patterns and predict future prices (open, high, low, close). This module predicts only one next candlestick but the prediction can be successfully used for different widths of candlestick, i.e., the number of trading days in one candlestick. The module has been enhanced to calculate result that is composed from different historical periods that allows making the forecast more accurate. Also it can perform comparative forecast analysis for many symbols.

Different chart patterns including candlesticks have been known in technical analysis for long. Now many of them considered as typical or classical ones. These patterns can signal a particular bullish or bear trend. Naturally, the signals are not successful all the time but give at least the most probable scenario of price movement. On the other hand, many other patterns have not been described yet. However, whether these patterns are known or unknown, many of them can be repeatable in the future and, therefore, they all can be used for prediction in the stock market.

To facilitate the job to memorize many different patterns and analyze a huge amount of charts, some chartists use special software tools – pattern recognition systems. These tools normally perform statistical analysis and filtration assuming that the patterns are generated by a probabilistic system and can be persistent in the future. The statistical researches of charts also show that indeed many formed patterns have typical structures of price developments.

Technical Analyzer TA-1 (TA) by Addaptron Software has a feature to predict a future trend of stock, ETF, or index prices using pattern similarity filters. The prediction period can be chosen within a range 1..60 trading days; the period of historical data that used for matching is recommended in 4..16 times longer than prediction period. TA searches for the best matches by scanning all historical data from the internal database. The typical number of scanned patterns is around 200,000 (if the number of symbols in the database is around 500).

TA ranks all possible matches on the basis of maximum correlation and minimum deviation within given historical period. It performs pattern matching using open, high, low, and close prices and volume data. When scanning is completed, depending on degree of similarity, TA ranks all possible matches within given historical period and then combine them into a single structure. TA composes forecast using several best matched patterns (top ranked). Since the statistical regularities of the patterns help to create more stable picture, TA allows adding up many top-rated patterns. The composite result is built as a weighted average with weights that are proportional to patterns’ ranks.

Nothing in this piece or on this web site should be construed as investment advice in any way. Always do your own research or/and consult a qualified investment advisor. It is wise to analyze data from multiple sources and draw your own conclusions based on the soundest principles. Be aware of the risks involved in stock investments.